February 23, 2022 - 7:15am
It’s starting to heat up in Ukraine. This week Russian President Vladimir Putin formally recognised the two breakaway republics in the eastern Donbas region, and some Western analysts are claiming that this is just the beginning of a full-scale invasion of the country. That remains to be seen, but even if a full-scale invasion doesn’t transpire, Russia has already been hit with a new barrage of sanctions.
The West first used sanctions against Russia the last time there was trouble in Ukraine, eight years ago. It all started in March 2014, when then-President Barack Obama announced travel bans and asset-freezes for those responsible for the military intervention in Crimea. Over the next year, many more rounds followed, aimed especially at the finance, defence and oil sectors. A full array of blocs and countries got in on the action — from the European Union to Australia.
During that year, the Russian economy collapsed. Their currency, the rouble, halved in value. Inflation peaked at 17%. Interest rates were raised to 15% to stop the bleeding and the Russian economy slipped into a recession. The fear in Russia was palpable. I still remember a Russian woman I had gone to university with reaching out to me on Facebook and asking if I would donate sterling to her charity. Many Russians alive today remember the catastrophic collapse of the USSR and in those dark days of 2014, they thought it was happening all over again.
But the disaster was short lived. After less than a year, the rouble stabilised, inflation came down and the economy started growing again. Many in London and Washington had convinced themselves that they had brought Russia to its knees. Had they?
If they had, it was not through sanctions. Sanctions work effectively on tiny economies like Cuba, but they do not work well against large economies like Russia, especially those which are heavily reliant on oil and gas exports. Oil and gas are hot commodities, and they are what economists call ‘fungible goods’, meaning they can be easily interchanged with another form of the same product. If we try to block Russian oil and gas exports, we will have to buy from another producer and the countries that once bought from that producer will simply turn to buy from Russia. Supply and demand sorts it out.
What really brought the Russian economy to its knees was the 2014 collapse in the oil price. The rouble is correlated with the oil price; if the latter falls sharply, the former follows it down. So, what drove the decline in the oil price in 2014?
Some have claimed that the US and the UK used their diplomatic clout — especially with Saudi Arabia — to dump oil supply onto the market and crash the price. But even if this was true, it’s unlikely they could repeat the same trick. Back in 2014, the world was growing sluggishly, the oil price was extremely high, and the US had massively increased its oil and gas production through the then-new technology of fracking. Today the world is in a different place; the world economy is running hot – some would say: too hot. The US is still energy independent, but it is no longer gaining rapid ground over the energy market share. That means that the impact of fracking on energy markets has already been ‘baked in’.
The other difference is that in 2014, Russia had been living with windfall oil revenues for years. Between 2011 and 2014, oil rarely slipped below $100 a barrel. Today we are seeing similar prices, but they are a very recent phenomenon. Since 2016, oil has rarely crossed $70 a barrel. For this reason, the rouble is likely less sensitive to the oil price than it was in 2014.
It is the energy market, not the bluster of Western politicians, that we should keep an eye on. The sanctions are — from a macroeconomic point-of-view, at least — kabuki theatre.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeI understand the various Western provocations of Putin and the arguments for why we may have stoked the Russian bear.
Yet I do feel it’s important that we, as defenders of what remains of the Western-led liberal order, categorically and unequivocally reject what Russia is now doing, on the simple grounds that they have trampled on the sovereignty of another nation-state.
Call me an idealist, but I do believe it is worth paying an (economic) price in order to put Mr Putin back in his box, as it were. It is worth putting aside our various disagreements on covid, culture wars or whatever else, to express clear solidarity and stand up to this naked aggression, with every instrument short of outright war.
Sorry a bit out of context I know. But a fundamental point.
An insightful phrase here is:- “What remains of the Western-led liberal order”.
The oil price fall in November 2014 had more effect than sanctions which started to be applied in June 2014, as I recall. EU, Australia (who lost dozens of homebound citizens and residents on MH17) and then USA.
First thing I noticed was that a steak restaurant in Eastern Russia that I used to visit on annual business trips changed its blackboard outside from “all our steaks from Australia, USA and NZ” to just “NZ “.
That was a retaliatory Russian sanction, on Australian beef, which they can do without. But not on Australian lamb/mutton, which they can’t. The cheese didn’t bother anyone much and they soon had their versions of mozzarella, parmesan and brie in the shops anyway.
But ultimately such isolation is very damaging to Russia, economically and psychologically. When Putin came to power Russia was twice as wealthy per capita as China. Today the Chinese are wealthier on average, and in another twenty years the gap will have widened dramatically. They may also have grabbed a chunk of the depopulated but resource rich Russian Far East, given that internationally recognised borders are no longer a thing. Western leaders have been pathetic in their weakness and short sightedness, but Putin is no better. Compared to former times, Russia’s contribution to the economic, scientific and cultural wealth of the world is now pitiful.
“Sanctions work effectively on tiny economies like Cuba, but they do not work well against large economies like Russia, especially those which are heavily reliant on oil and gas exports. “
Are you daft? Please explain how sanctions have worked effectively in Cuba. 60+ years and sanctions did nothing!
I suppose it depends on what you mean by “work”. The Government of Cuba and its ideology were not affected, which presumably was the intention of US sanctions, but its economy was adversely affected, which provided the Cuban government with an excuse for lack of development.
Of course you’re correct, you make a valid point, but I though “work,” in this context, would mean regime change. If “work” means “make [some of] the Cuban people suffer,” then yes, sanctions work/ed.
Didn’t Bill Clinton say it depends on what “is” is, or some such tosh?
A point made by a sceptical French journalist is that Europe will now have to look elsewhere for supplies of gas – and the US is lining up with its expensive liquid stuff to boost its own economy. The US will benefit from the sanctions, Europe will suffer.
In the retrospect of historical judgement Chamberlain was condemned for his dealings with Hitler. But we see today the same dynamic playing out today with a European population both militarily and psychologically unprepared for war over a small country of which we know little with a substantial and concentrated ethnically Russian population giving excuse for the incursion, just as Hitler had a similar point in respect to the Sudetenland German populations of Czechoslovakia or the Germanic population of Austria.
I believe the US & EU should not be getting involved with Russian politics at the juncture. I cannot understand why these powers are stoking a potential war apart from that it is in their interests to do so. Nato membership should not have been offered, if indeed it was and we should understand that a significant proportion of those living in the Ukraine are ethnic Russians and that Russia is perfectly capable of forbearing any sanctions that we might impose.
There’s also the not-insignificant social effect of a populace weathering a period of sanctions and economic distress like you described in 2014, and emerging with a (most counterproductive to Western ends) complete “O RLY? F*** you!” mindset towards Western intervention.